Tata Motors Get Closer To Delist 'A' Ordinary Shares: Why Investors Will Pay Taxes On Tata Motors DVR Shares?

Tata Group-backed Tata Motors is getting closer to delisting entire share capital of Tata Motors DVR. The auto giant has received a 'no objection' from BSE and NSE. While this development has both pros and cons, bringing both opportunities a pile of taxes for investors. Nevertheless, Tata Motors' share price is nearing its 52-week high levels.

As per its regulatory filing, Tata Motors said that "BSE Limited vide its letter dated December 20, 2023, and National Stock Exchange of India Limited vide its letter dated December 21, 2023, have granted their no objections ("NoC") to the scheme of arrangement amongst Tata Motors Limited and its Shareholders and Creditors for cancellation of the entire 'A' Ordinary Share Capital of the Company and issuance and allotment of Ordinary Shares as consideration for such reduction of capital.."

On BSE, Tata Motors' share price ended at Rs 724.60 apiece, up by 2.24% on Friday with a market cap of Rs 2,40,773.50 crore. The stock is near its 52-week high of Rs 734.85 apiece.

Tata Motors first announced the scheme of arrangement for delisting it's A' ordinary shares on July 25.

As part of the arrangement, Tata Motors will issue 7 fully paid-up New Ordinary shares of face value of Rs 2 each for every 10 'A'
Ordinary Shares of the face value of Rs 2 each as a consideration for the reduction and
cancellation of 'A' Ordinary Shares.

Will the delisting of Tata Motors DVR shares cost you in the form of taxes?

In its filing on July 25, Tata Motors confirmed that taxes will be given to the relevant shareholders in terms of the Scheme.

It said, "For the purposes of, inter alia, transfer of the consideration for the reduction of the 'A' Ordinary Shares by the Company to the relevant shareholders, the Company will, prior to the date of effectiveness of the Scheme, settle a trust. The trust will receive the New Ordinary Shares from the Company on behalf and for the benefit of each of the relevant shareholders as contemplated in the Scheme and will thereafter, postsale of the requisite number of New Ordinary Shares required to discharge certain obligations, inter alia, in relation to taxes payable and completion of the other actions as specified in the Scheme, distribute the remaining New Ordinary Shares to the relevant shareholders in terms of the Scheme.:

After the scheme of arrangement announcement, few months ago, Suril Mehta, Partner at K.C. Mehta & Co. LLP through his LinkedIn post said, "Note that they didn't 'convert' DVR into Ordinary Shares. They went for a court-capital-reduction scheme. What's the difference? Apparently nothing, actually. However the latter, which is what Tata Motors has done, has resulted in a huge dividend taxation. It's surprising that a simple change in rights of the shares should result in tax."

Mehta's post added, "Also - this is dividend tax which is the worst of all - with the top slab being 35.88%!!! This is an unfortunate gap in restructuring laws, which ought to have been tax neutral."

He also pointed one pointer that court based buyback against which ordinary shares are issued. The tax will at least reduce - from 35.88% (highest slab) to 18.89% in case of buyback. Note that it's possible that the effective dividend tax is less than 30%, but unlikely to be less than 20%.

Also, TaxGuru in its report in July said that regarding taxation, 'A' ordinary shareholders will face taxation, which includes withholding taxes for deemed dividends and capital gains. To handle the tax liabilities, the company will establish an independent trust to execute the scheme. This trust will sell ordinary shares to cover the relevant taxes, and the remaining net ordinary shares and cash for fractional entitlement will be added to the shareholders' accounts.

The difference between Tata Motors ordinary shares and Tata Motors DVR shares aka 'A' ordinary shares is that -- the shareholders of the former have more voting rights than the latter. But shareholders of Tata Motors DVR enjoy much higher dividends than Tata Motors ordinary shares.

As per Motilal Oswal's website, these DVR shares are therefore very useful for companies that want to raise money in the market without diluting effective control of the company. Secondly, to compensate for the lower voting rights, these DVR shares are paid a dividend premium of 10-20%. This ideally should make sense for the small and retail shareholders as they normally do not participate in the voting process. Giving away part of their voting rights for higher dividends is a good ploy for these shareholders. Additionally, since DVRs have always quoted at a discount of 30-40% in the Indian context, the higher dividend pay-out makes the DVR a lot more attractive in terms of dividend yields.

On BSE, Tata Motors DVR share price ended at Rs 486.55 apiece, up by 2.56%, with a market cap of Rs 24,741.21 crore. The DVR shares are also near their 52-week high of Rs 494.90 apiece.

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